FolioBeyond Equity Commentary for November 2020
Two months may not make a trend
With two months of the 4th quarter under our belts, we have seen a major short-term reversal in relative sector strength in the Equity markets. After lagging significantly for some time (and still on the year), Small Cap and Value Equity sectors outperformed the Large Cap Growth space. And the numbers are striking.
It would be easy to say that relative valuations were stressed and that all we needed was positive vaccine news to initiate this adjustment. But Value and Small Size Equities have had many false starts these past few years so this adjustment would need to show some legs before our approach would overweight these sectors, as extreme as these near-term moves have been.
US Small Cap Equities were up roughly 25% on the quarter-to-date (“QTD”) while US Large Cap Value was up anywhere from 12% to 20%. International Developed Equities were up anywhere from 5-14% and Emerging Market Equities were up in the range of 6-11%. Granted, that still leaves those sectors anywhere from approximately -12% to 5% year-to-date (“YTD”) but it closes the gap significantly on the underperformance we had reported. In contrast, QTD Large Cap Growth Equities were up roughly 6-8%.
So, what does that mean for portfolios YTD? Still lagging our broad benchmark, MSCI’s All Country World Index (“ACWI”), given the severe underperformance in the 1st quarter. While the Equity portion of accounts were up over 11% on the month and roughly 9% on the quarter, they are still down between 1.5-1.8% YTD, while ACWI is up roughly 11% YTD. Our portfolios still have an overweighting to larger cap sectors through Momentum ETFs, both domestically and in non-US exposures, as that Factor has been the dominant force in Equity markets over the last three to five years by capturing the relative strength of the Large Cap Growth sector. But we do have a marginal overweight now to non-US Equities, which helped us keep pace with the benchmark this quarter.
The Fixed Income portion of client accounts was up about 1.25% on the month with the bulk of the return coming from and narrowing in credit spreads and appreciation in holding values. With current yields now so low, only about 0.1% of the absolute return came from interest income.
There is a growing contrarian consensus that all markets have gotten a bit ahead of themselves, so while we can be happy for the recovery we have seen in markets in the face of this year’s volatility, a lot of the upside in the expected recovery seems to already be priced in. And low rates have just amplified these perceived extremes in valuations.
